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Tuesday, September 26, 2017

CIMB Research retains Add for pharma company YSP

Tuesday, 26 Sep 20178:08 AM MYT

KUALA LUMPUR: CIMB Equities Research is retaining its Add call for YSP Southeast Asia Holdings Bhd and advises investors accumulate shares of the pharmaceutical company.

It said on Tuesday it maintained its earnings estimate and Add call. Its sum-of-parts based target price of RM3.50 is also kept unchanged, with the pharmaceutical business still valued at 14.2 times CY18F price-to-earnings (P/E) (20% discount to CIMB’s pharmaceutical sector historical five-year mean of 17.7 times).

“YSP's FY1719F yield of 3.8-4.9% is the second highest among pharmaceutical stocks under our coverage. We advocate that investors accumulate this stock, given its strong earnings prospects and undemanding valuations,” it said.

CIMB Research organised a meeting last week for YSP’s management and 25 buy-side analysts and fund managers.

The key takeaways were: i) growth prospects, especially in potential overseas markets, ii) updates on existing operations, and iii) outlook of the pharmaceutical industry.

“YSP believes that outlook for generic drugs should remain bright for both the local and overseas markets.

“Domestic demand for generics should be spurred by the increase in product offerings and higher uptake by healthcare providers, especially private players,” it said.

Besides government facilities, private healthcare players are also increasingly switching to generics due to their lower costs and widening product offering.

As sales to private GPs/hospitals make up 50% of YSP's FY16 sales, it is set to benefit from this trend.

For its overseas market, YSP plans to increase its product offering, as well as boost its product visibility through better marketing efforts. It will focus on key growth markets, especially countries with a large population and low generic drug penetration.

While its peers typically sell through distributors in their overseas markets, YSP has its own marketing team in its key overseas markets (Vietnam, Singapore and Indonesia) and only utilise distributors in countries with smaller market potential.

Vietnam showing positives in 1H17, trial runs ongoing in Indonesia YSP's Vietnam operations, which have been recording losses since the completion of its factory in 2011, showed signs of turning around in 1H17, thanks to higher sales through a wider product portfolio.

This development is a positive as its losses have negatively affected YSP's bottomline in recent years.

Meanwhile, YSP's Indonesian plant has begun trial runs, and product registrations are underway. As the registration process may take up to 1.5-2 years, any material earnings impact should likely be only visible from 2H19.

“Downside risks to our view i) Sharp decline in sales volume, ii) product registrations in the export markets taking longer than expected, and iii) lower contribution from Vietnam and Indonesia,” said the research house.


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